European VC overhang hits $10.5 billion

Although the total amount of new VC funds raised in Europe has been lacklustre and averaging around $1.2 billion per year, the amount of uninvested VC funds (referred to as overhang) has grown substantially to hit $10,493 million, according to figures released by VentureOne, a unit of Dow Jones. The firm surveyed 90 funds raised since 1999 by European-headquartered venture capital and corporate investors.

Advertisement

The data suggests that half the overhang amount is due to bubble era funds: 13% of 1999 funds, 18% of 2000 funds and 30% of 2001 funds remain to be invested. Those years were the largest venture capital fund-raising years on record in Europe, and together represent €5.4 billion, over 50% the overhang.

In comparison, the overhang of US venture capital funds is $53.6 billion - or €41.8 billion - but U.S. firms have raised considerably larger venture capital funds. Comparing the percentage remaining, the numbers are similar. In the US, about 20% of 2000 funds and 33% of 2001 funds remain unspent, although only 5.5% of 1999 funds remain unspent.

“Considering the slowdown in venture capital fund-raising over the past two years in Europe, the overhang of European capital could be exhausted much quicker than in the US,” said Steve Harmston, director of international research for VentureOne. “That being said, the venture capital investment level in Europe currently remains at a much slower pace - about €3.5 billion annually, or one-fifth the rate of US investment - which means there is still a considerable pool of money outstanding that could be used to support both new startups and follow-on investments in existing portfolio companies.”

As expected, the younger the funds, the higher the percentage that remains to be invested. Remaining unspent are about 53% of the funds raised in 2002, 64% of the amount raised in 2003 and 86% of the amount raised in 2004.

Overall, venture capital fundraising in 2004 was €1.3 billion, a drop from the €1.5 billion raised in 2003. Fund-raising in Europe has been on a decline since 2000, when €13.6 billion was raised in venture capital funds.

The Chilli perspective The overhang figures create a great perception dilemma for new startups, which have difficulty in raising any S2, S3, R1 funds (see definitions), and negative perception problems for VCs. This is created because VCs are hanging on to portions of their vintage funds for follow on investments with their existing portfolio companies.

Although this is standard practice in the industry, the portion of overhang is too high. For example, $1.9 billion from the year 2000 still remains uninvested. So what is the point in raising new funds if existing funds have not been allocated or invested yet? Some VCs are concerned that they may not be able to raise any new funds that can be used to meet their existing commitments and therefore hanging on to what remains. The old chestnut about not finding sufficiently talented management teams in which to invest will not wash anymore, as competitive funds start showing positive results – note some of the recent IPOs and trade sale exits.

It wouldn’t be so bad if the total IRR from some of these vintage funds were above average, but some limited partners may be wondering ‘what is the point of risking and committing such capital if the total returns are no different than the average interest rate from bank deposits?’

Meanwhile, several new promising startups in Europe are calling it a day, due to severe lack of seed stage and early stage funds. Although the debate about the so-called equity gap continues unabated, no concrete solutions have been proposed or executed. Given this scenario, it is understandable why so many technology entrepreneurs in Europe feel frustrated and stifled. Let the brain drain begin in earnest.

Comments on this story? Send an email to the editor at Editor@TheChilli.com